With the rising cost of living, inflation, and the steady increase in property prices, it is becoming increasingly challenging to get on the property ladder. We have put together this guide to provide you with the best tips to maximise your chances of success with your mortgage application.
Don’t expect you to be a fit for every lender
Lenders have different criteria and affordability models and the best lender for you may not be the same for someone else. Each lender has its own risk models and often focuses on specific sectors of the mortgage market. Therefore, it is important to shop around and explore different options
Lenders consider various factors when making lending decisions, including:
- Credit score:Your credit score plays a significant role in determining your eligibility for a mortgage. Lenders assess your creditworthiness based on your credit history, including your payment history, outstanding debts, and credit utilisation.
- Loan-to-value (LTV) ratio:The LTV ratio compares the loan amount to the appraised value of the property. Lenders prefer lower LTV ratios as it indicates a smaller risk for them. A higher down payment can help lower the LTV ratio.
- Employment status and income:Lenders evaluate your employment status, stability, and income level to assess your ability to repay the mortgage. They typically look for steady employment and sufficient income to cover the mortgage payments.
- Loan size:The size of the loan you are seeking also influences the lender’s decision. Some lenders specialize in larger loans, while others focus on smaller loan amounts.
- Debt-to-income (DTI) ratio:Your DTI ratio compares your monthly debt obligations to your income. Lenders want to ensure that you have enough income to cover your existing debts and the mortgage payment without straining your finances.
There is little reward for loyalty in the market. Simply approaching your bank or a previous mortgage provider may not result in the most favorable terms or increase your chances of success.
Check your credit report
Before applying for a mortgage, it is highly recommended to check your credit report. Here are the benefits of checking your credit report and some reputable agencies to check with:
Benefits of checking your credit report:
- Identify inaccuracies:Checking your credit report allows you to identify any errors or inaccuracies that may be negatively impacting your credit score. It gives you an opportunity to dispute and correct these errors before applying for a mortgage.
- Improve your credit score:Reviewing your credit report helps you understand the factors influencing your credit score. By identifying areas that need improvement, such as high credit utilization or late payments, you can take steps to address them and potentially increase your credit score.
- Assess your creditworthiness:Lenders rely on your credit report to assess your creditworthiness. By checking your credit report, you can evaluate your own financial standing and determine how likely you are to be approved for a mortgage. This allows you to make necessary adjustments or consider alternative options if needed.
Reputable agencies to check your credit report with:
- Equifax:Equifax is one of the major credit reporting agencies and provides credit reports and credit scores to individuals. You can access your credit report through their website or by requesting a free copy annually.
- Experian:Experian is another well-known credit reporting agency that offers credit reports and scores. They provide detailed information about your credit history and factors affecting your credit score.
- TransUnion:TransUnion is one of the leading credit reporting agencies, and they provide credit reports and credit scores to individuals. You can access your credit report through their website or by requesting a free copy once a year.
It is recommended to check your credit report with multiple agencies to ensure accuracy and to have a comprehensive understanding of your credit profile. Checking your credit report in advance allows you to address any issues or discrepancies and improve your chances of a successful mortgage application.
Rectify and errors or misinformation on your credit report
If you find incorrect or inaccurate information on your credit report in the UK, it’s essential to take steps to update and correct it. Here are the recommended ways to address such issues:
- Contact the credit reference agency:Get in touch with the credit reference agency (such as Equifax, Experian, or TransUnion) that provided the credit report with the inaccurate information. Inform them about the specific errors and provide any supporting documents or evidence that can help rectify the mistakes.
- File a dispute:Credit reference agencies typically have a process for disputing inaccurate information on your credit report. Follow their guidelines and submit a formal dispute, clearly outlining the errors and providing any relevant documentation. This dispute will prompt an investigation into the matter.
- Provide supporting evidence:Gather any documentation that supports your claim of incorrect information. This may include bank statements, payment receipts, or correspondence with lenders. Submit these documents along with your dispute to strengthen your case for the inaccuracies to be corrected.
- Contact the data provider:In addition to contacting the credit reference agency, you may need to reach out to the data provider—the organization or lender that reported the inaccurate information. This could be a bank, credit card company, or other financial institution. Inform them about the errors and request that they update their records and notify the credit reference agency accordingly.
- Monitor the resolution:Keep track of the progress of your dispute and follow up with the credit reference agency to ensure that the incorrect information is being investigated and corrected. Credit reference agencies are generally required to investigate disputes within a specific timeframe.
Remember, it’s important to address any inaccuracies promptly, as they can impact your credit score and affect your ability to secure favorable mortgage terms. Regularly monitoring your credit report and promptly correcting any errors is crucial for maintaining a healthy credit profile.
You should check if the corrected information has been updated with all three credit reference agencies in the UK (Equifax, Experian, and TransUnion). While you may have contacted one agency to correct the inaccuracies, it’s important to ensure that the updated information reflects consistently across all three agencies.
Register to vote to improve your credit score and chances of mortgage success
No Registering to vote can indeed have a positive impact on your credit score and can be beneficial for your mortgage application. Here’s why:
- Electoral roll information:When you register to vote, your name and address are included in the electoral roll. Credit reference agencies use this information to verify your identity and address when assessing your creditworthiness. Being registered on the electoral roll can provide proof of residence and stability, which lenders consider when evaluating mortgage applications.
- Address verification:Registering to vote helps lenders confirm your address history. This can be crucial for mortgage applications, as lenders typically require a stable address history to assess your financial stability and credibility.
- Improved credit score:Being on the electoral roll can positively impact your credit score. Credit reference agencies consider electoral roll registration as an indicator of stability and reliability. This can contribute to a higher credit score, making you more appealing to lenders and increasing your chances of obtaining favorable mortgage terms.
Therefore, even if you don’t actively participate in voting, it is still worthwhile to check and ensure that you are registered to vote. This simple step can potentially enhance your creditworthiness and improve your prospects during the mortgage application process.
Delink from ex partners or flatmates to stop their credit history wrecking your chances
If you have a financial association with someone, typically through joint credit applications like a joint bank account, mortgage, or loan, but you are now separated or no longer connected to them, it is important to disassociate yourself.
Remaining linked to them can result in negative consequences if they have late payments or engage in any misconduct, as it will reflect poorly on your credit profile. To address this, contact the credit agencies and request a “disassociation” notice.
It’s also worth checking whether you are still linked to previous flatmates, especially if you had a joint bank account for shared bills.
Ensure that their credit history does not affect yours, and if it does, take steps to disassociate yourself promptly.
Even if the person you are linked to currently has a good credit history, there is still a risk of future problems if they miss payments.
Cut back on spending
When applying for a mortgage, it’s important to maintain reasonable spending habits. Lenders usually request your latest 1-3 months of bank statements, and while day-to-day spending is factored in, excessive spending on luxuries can be a concern for lenders and your expenses can be factored into the lender’s affordability calculations.
Pay your bills on time
Paying your bills on time is not only obvious but essential. Failure to make timely payments can lead to missed payments, defaults, or even county court judgments (CCJs). Any of these can have a catastrophic impact on your mortgage application. Therefore, it is crucial to prioritize paying your bills promptly and ensure a solid payment history, which is vital for a successful mortgage application.
To maximise your chances of mortgage approval, it’s advisable to minimize credit applications in the months leading up to your mortgage application. Applying for credit, such as loans, credit cards, overdrafts, or mobile phone or utility contracts, triggers a ‘hard’ credit check, which is registered on your credit file, regardless of whether you proceed with the contract.
Increase your deposit by £100
Increasing your deposit slightly to improve your loan-to-value ratio can indeed have an impact when applying for a mortgage. Let’s consider an example: if you’re seeking a £90,000 mortgage for a £100,000 property at a 90% loan-to-value (LTV) ratio, you may discover that certain lenders have lower credit scoring requirements for loan-to-values below 90%.
By adding an extra £100 to your deposit and borrowing at an 89.9% LTV, you not only improve your chances of approval but also potentially increase the amount you can borrow. This slight adjustment in the loan-to-value ratio may make you eligible for more favorable credit scoring terms and a higher mortgage amount offered by lenders. It’s worth exploring this strategy as it could positively impact both your chances of approval and borrowing potential.
Making a slight adjustment to the loan-to-value (LTV) ratio can have a significant impact on the amount you can borrow based on your income. For instance, let’s say the lender typically offers a mortgage amount of up to 4.5 times your income. By lowering the LTV ratio through a small increase in your deposit, you may become eligible to borrow up to 4.75 times your income instead.
In other words, by contributing an additional £100 to your deposit, you may potentially increase the amount you can borrow and afford a higher-priced property. This minor adjustment in the LTV ratio can have a meaningful effect on your borrowing capacity and allow you to maximize your mortgage potential.
Joint a Pay your rent scheme and let it improve your credit score
Paying your rent on time can have a significant impact on your credit score, and there are schemes available that utilize this to improve your creditworthiness. By participating in such schemes, your consistent and timely rent payments are reported to credit agencies, positively influencing your credit score.
However, it’s important to note that the opposite is also true. If you fail to pay your rent while enrolled in one of these schemes, it can result in a negative impact on your credit score. It’s crucial to maintain your rent payments diligently to reap the benefits of improved creditworthiness through these schemes.
Try to avoid using your overdraft
It’s advisable to avoid relying on your overdraft when applying for a mortgage. However, if you do need to use it, make sure to stay within the limits and avoid living dangerously by consistently being close to the limit for prolonged periods. It’s important to note that some lenders consider overdraft balances when assessing affordability. Therefore, maintaining a healthy overdraft usage and not relying heavily on it can positively impact your mortgage application.
Do not apply for credit in the lead up to or while applying for a mortgage
Having numerous credit searches within a short timeframe can negatively impact your creditworthiness, as lenders may perceive it as a sign of desperation for borrowing. Therefore, it’s recommended to avoid credit applications for at least three months before seeking a mortgage, with some experts suggesting a six-month gap for added safety.
The Credit Scores guide provides detailed information on this matter.
If you must apply for credit, one application is unlikely to have a significant impact as long as it’s affordable. However, it’s worth noting that having a payday loan within the past year may lead some lenders to decline your mortgage application.
Research has shown that a considerable number of first-time buyers who were rejected for a mortgage had their applications declined due to a previous payday loan.
Carefully manage your available credit
Maintaining a balance with your credit rating requires managing your credit utilization effectively while demonstrating your ability to handle debts. According to credit reference agencies, it is advisable to keep your credit utilisation below 25% of your available credit. Therefore, if having a balance would push your debt utilization to a high level, it is generally not recommended to decrease your credit limits.
Close inactive accounts to improve your credit score
Closing inactive credit accounts can potentially improve your credit rating. Keeping numerous unused credit accounts open may increase your overall available credit, but it can also lead to higher credit utilisation ratios, which may negatively impact your credit score.
By closing inactive accounts, you can reduce the amount of available credit and potentially lower your credit utilization, resulting in a better credit rating. However, it’s important to consider the potential impact on your credit history and length of credit when closing accounts.
Get your paper work in order
Ensuring that your paperwork is well-organised will greatly facilitate the assessment of your mortgage application, expedite the process, and improve your chances of success. It’s important to gather the necessary documents in advance. Here are some essential documents you’ll likely need:
- Identification (ID):Prepare valid forms of identification, such as your passport or driver’s license, to verify your identity.
- Payslips and income documents:Gather your recent payslips to demonstrate your income stability. Additionally, you may need additional income documents, such as tax returns or employment contracts, especially if you’re self-employed or have multiple sources of income.
- Bank statements:Provide your most recent bank statements to showcase your financial transactions, savings, and regular income deposits.
- Proof of address:Furnish documents that verify your current address, such as utility bills, bank statements, or official letters. It’s worth noting that some lenders may not accept electronic copies (PDFs), so having physical copies can be helpful.
By having all the necessary paperwork in order, including physical copies of proof of address if required, you’ll streamline the application process, demonstrate your preparedness, and enhance your chances of a successful mortgage application.
Get a mortgage pre-approval with an AIP
Obtaining an Agreement in Principle (AIP) is a smart move when starting your mortgage journey. Ideally, opt for a lender that performs only a soft credit check during this stage. This way, you can explore your options without worrying about a negative impact on your credit score. Plus, having an AIP gives you peace of mind and puts you in a stronger position when making an offer on a property.
To ensure you make the most informed decision, it’s advisable to work with a broker or advisor rather than relying solely on online platforms. With their expertise, they can review your AIP and cross-check it with various lenders’ criteria, helping you find the best mortgage options available.
By obtaining an AIP and seeking professional guidance, you’ll gain confidence in your mortgage search, make informed decisions, and increase your chances of securing a favorable mortgage offer.
Rejected? Stop before you make another move
If your mortgage application is rejected, there’s no need to panic. Instead, take a moment to pause and assess the situation. Start by reviewing your credit report and seek the advice of a broker to understand the reasons behind the rejection. It’s important not to rush into another application immediately, as consecutive rejections can further lower your credit rating.
By taking the time to understand why you were declined, you can address any potential issues and ensure that your next application is more likely to be considered by the lender. Working with a broker can be beneficial as they can provide valuable insights and guide you towards lenders who may be more accommodating given your specific circumstances.
Remember, setbacks happen, but they shouldn’t discourage you. Take a step back, gather information, and make an informed decision when you’re ready to reapply. By doing so, you’ll have a better chance of success and avoid any further negative impact on your credit rating.